Keep the drama in Brazil

Despite Economy Minister Axel Kicillof’s hardball over Manhattan judge Thomas Griesa restoring a stay on his ruling favouring hedge fund creditors, the atmosphere after the first day of talks with a court-appointed mediator was anything but confrontational with even the worst-case scenario of a technical default looking less than catastrophic. Kicillof’s stance largely stemmed from anxiety that an early settlement inside this month’s grace period might open up the Pandora’s box of the “rights upon future offers” clause (valid for the rest of this year) to include the creditors accepting the 2005 and 2010 haircuts. This seems to be understood by at least some of the hedge funds who have indicated a willingness not only to accept bonds but also to wait until early 2015 (the anniversary of the late Néstor Kirchner’s famous full payment to the International Monetary Fund?). And should Griesa refuse to be swayed from his pedantic inflexibility with push coming to shove, some analysts see a technical default as not only the most likely but almost the most desirable outcome — always assuming that such a default is strictly selective with Argentina continuing to pay as many creditors as possible (including the recently incurred obligations to the Paris Club, Repsol, etc.). Yet a technical default is never ideal — while not catastrophic, it would accelerate inflation and push stagnation into negative growth.

Since the outside world (including the most aggressive financial speculators) seems to expect an ordered solution to be found to this mostly technical difference over a relatively modest sum, the main dangers of escalating this issue into anything resembling a crisis lie largely on the home front, on both sides of the political divide. Not only is Independence Day today (above all with Argentina playing a World Cup semi-final and through to the tournament’s last weekend) the perfect occasion for ultra-nationalism — there is also the temptation of the obvious (perhaps too obvious) diversionary strategy of wrapping a “fatherland or vultures” banner around all other problems. On the opposition side, the mere word “default” evoking the 2001-2 meltdown is more than enough to spark the least responsible into the direst doom and gloom forecasts, all too ready to throw out the baby with the bathwater if national ruin topples a government. Fortunately, neither of these visions shows much sign of either influencing government attitudes or the course of negotiations.

So let us leave all the drama to the closing stages of the World Cup and keep it out of the debt talks.